There are three critical fallacies in financial services risk management systems and algo trading systems: The future replicates the past. All statistically-based models of future prediction use past events as indicators of the probability distributions of future events – but in a world of change the past is an unreliable guide to the future. Risk is quantifiable. Standardised risk management systems can only take account of risk that can be quantified. Yet, to the extent that risk is dependent on human behaviour rather than random ‘acts-of-nature’, their inability to take account of the idiosyncrasies of individual character and behaviour means... Continue reading